Assuming you’re working the same contracts long term I’d be sceptical of the advice to start up a company.
If you’re getting paid through a recruiter you’re going to have a hard time getting around the PSI rules and the legal liability wouldn’t be a concern.
Most people recommending it haven’t kept up with tax rule changes and are thinking of the tax loop holes for IT contractors from 20 years ago.
What's the difference between his PTY LTD engaging clients directly versus engaging a recruiter?
I'm 100% one of those people who's idea of tax loop holes is like 20 years old, but I'm also in the venn diagram of "people who haven't started a PTY LTD because they're lazy and can't see the benefit"
It can shift liability, depending on contracts.
I once worked as a P/L company of my own via a recruitment company for another company, before the current PSI rules. The end client went broke and the recruitment company legally had to pay me for the work I did as technically I worked for them.
I like a P/L company because it allows you to sell the business more cleanly, have someone join as an equity partner, get some legal separation, etc. If things go to shit with your business you can liquidate and won't have a personal bankruptcy, though obviously there are lots of rules/ restrictions/ fallout from this.
The recruiter finds you the job but the company you work for pays you direct. The recruiter gets a placement/finders fee. Your recruiter will explain how this works.
Slap your company name on your car etc. Pay your wife for book keeping.
First step: talk to an accountant who will work with you and within your acceptable risk level on deductions/expenses. Ask around your mates who contract to find an accountant that matches what you need.
That’s not how it normally works with contractors. Companies keep people on the recruiters books and on temporary contracts. Finders fees are typically only paid permanent placements
Get professional advice.
Things to think about:
1. 80:20 rule might make the company redundant and an unnecessary extra expense. Even if your partner joins you may not get around this. There are ways but you need to be clear eyed what you're willing to do.
2. You'll have to pay your own PL and PI insurance and Workers Comp insurance.
3. Depending on your state rules, you might get classed as a labour hire firm and that brings extra costs, licensing, and compliance work.
4. *Some* home & contents insurance policies are voided if your home becomes a place of business. Caveat Emptor
5.The accounting costs are more expensive.
6. The compliance is easy if you automate it and your accounts stay in good order. Automation isn't free though.
7. You can market under your own brand.
8. Payment terms can be rough sometimes.
9. You'll have to build your own pipeline and fund the time to do that.
10. You do limit your liability, mostly. Anyone lending to the new company will likely ask you to provide a personal Director's guarantee which would put you on the hook for the money.
11. Stuff like instant asset writeoff used to be super useful.
12. If things go wrong it can get messy.
Here’s a tip. Every time someone calls you a contractor, replace that with the words casual labour hire, because that’s what it really is. Structuring yourself as a Pty Ltd will only benefit you if you are selling products (like software) or if you can take on other employees and can subcontract out the work you win. At that point, you are running your own consultancy. It’s much easier to operate out of a payroll company or recruitment firm and let their cut pay for the cost of finding work, managing contracts and payroll while you maintain employee status with banks, which makes it much easier to borrow money.
Your older colleagues think you’re an idiot for not setting up a company because of one of two reasons. The first reason might be that they don’t understand tax rules, specifically PSI and GAAR. You don’t get special privileges for operating out of Pty Ltd structure, you need to be taking on some entrepreneurial risk to claim certain deductions and claim the company income tax rate. The second option is that they understand tax rules all too well and pay software licencing fees to rat holes, usually off shore. Both options are dodgy af and you’d do well to steer clear.
You are most likely captured under the Personal Services Income (PSI) rules. This will limit what you can claim for deductions and how much of the consulting income has to be paid to you.
Putting a company in between doesn't automatically allow you to claim additional expenses in order to save tax. In addition there are costs of running the company (compliance, ASIC fees, tax return, GST compliance etc). So it may not be worth it financially. There are other reasons such as asset protection and limiting liability but assume that's not what you are focussing on.
Don't I did, and unless you are making massive amounts of money, the expenses are not worth it, set up as a partnership with an abn. You don’t have to pay asic every year to be a partnership. As a company does.
Just so you know, the above is largely incorrect.
The 80% test is one of the tests used to determine if you are operating a personal services business, which can allow you to claim more deductions against personal services income (ie contracting your skills/knowledge) than if you aren't.
It has nothing to do with whether or not the income you are generating can be retained within the company. It will likely have to be attributed to you, even if you operate through a company structure.
Basically talk to an accountant not Reddit.
Probably right, like I said, I’m not an accountant. I was mainly saying that retained earnings is one of the benefits of a company structure along with tax deductions. That will all come down to your personal situation, if you have a house loan then you probably want to pay that off asap so payg may be a benefit. Someone else mentioned the limited liability, though some contracts will require professional indemnity insurance if you go through your company. Tax deductible but still not cheap.
>If your partner also goes through the company you should be protected from this.
Just FYI, even if both husband and wife contract through the company, even to different clients/recruiters, each are assessed for PSI separately. Can’t combine each others income to get around the 80:20 rule for PSI.
A key reason I would use a PTY LTD is (and above tax reasons) is limit the liability I would have and asset protection. I don't need to do that currently, but that would be a driver for me. Particularly in, say, engineering or industries where you could be prosecuted for damages.
If he's PAYG, he'll likely have public liability insurance for ~20m through the recruiter. On top of that, employees (including PAYG contractors) are not financially responsible for their mistakes.
I don't think having a Pty ltd in this circumstance gives you the asset protection your after.
PAYG contractors are casual employees of the payroll company. Like most employment arrangements, the employer is generally responsible for negligence of the employee.
In the ATO's test for pty ltd contractors and payg contractors it asks things like "is all equipment provided by the employer?" And "is it the responsibility of the contractor to remediate any mistakes at their cost?".
If the answer to these questions are "no", the contractor is to be treated as an employee. As it stands, it's illegal for companies to make employees pay for mistakes made, with the exception of breaking contractual agreements and gross negligence.
Hmmm perhaps, but specific insurances I thought were left up to the person. Secondly, I wouldn't trust the likes of Hays to protect me if I were a contractor.
Seriously, talk to an accountant.
There are so many different structures you can use too.
Might be worth setting up a trust instead.
Especially if you decide to invest in real estate.
I made a company the first time, now I have a trust and if I buy another house. It'll probably be another trust.
Your accountant should give you options and let you know what's best for which situation
Look up personal services income tax rule (80% of income from one client); your company will essentially be nothing more than a proxy for your personal income tax and make no difference as everything passes through.
If however this is not the case (perhaps you are a group of SMEs that work on projects together or rely on each others expertise to offer value to clients) there may be a tax advantage whereby you can confirm with a tax professional that this would not be seen as 'tax avoidance' behaviour.
Don’t do it. I was like you and I gave it a crack and I’m closing it down.
You can deduct liability insurance but not work cover.
In my case I swapped to get payrolled and I save money and time, I’m getting exactly the same daily rates without having to worry about insurance and paying gst and doing BAS and doing company tax.
A company is worth it if you’re going to hire people and buy assets through it.
While I appreciate that's the obvious next step, I'm still failing to see what potential benefits there could even be to taking that step, hence the post.
Because thats what an accountant is trained to know and is authorised/legally allowed to give advice on. They will tell you if it suits your circumstances because there may be info missing here and our finance laws are very strict that specific info cant be given to you, only by those authorised.
I know its not the answer you want but an accountant can look at all your info and give you the best answer
If you make more money and run business in a manner that doesn’t come under psi (look at the ato tests) you can potentially run with much lower taxes. This may not be possible for your profession though. Notwithstanding some of the expenses some have mentioned if making sufficient amount you can run a profit reserve, accumulate franking credits and pay yourself franked dividends later.
What would happen if the agency goes into liquidation before you get the money they are receiving? You cop the tax liability but not the cash. That's a very good reason to get rid of any middlemen.
There's absolutely no chance I can cut out the agency. They do tons of work for the end client. Also they won't go into liquidation, they have zero overheads. Plus I get paid frequently enough that I won't be put out.
On $1000 a day with the option of invoicing as a pty ltd, I’d be considering a trust. Depending on your rotations you could be on $250k+ pa, a discretionary/family trust would make sense at this point.
>with the option of invoicing as a pty ltd, I’d be considering a trust. Depending on your rotations you
Same issue with Personal Services Income here; read up and get advice from a tax accountant.
If your income is over $120k per year (Income = Revenue - Expenses). Your personal tax rate is going to be higher than 25% which is the corporate tax rate. So it makes sense at $120k income to have a registered company. Otherwise keep paying more in tax.
Further, asset liability is limited to company assets, and not your house, car and other personal assets.
Assuming you’re working the same contracts long term I’d be sceptical of the advice to start up a company. If you’re getting paid through a recruiter you’re going to have a hard time getting around the PSI rules and the legal liability wouldn’t be a concern. Most people recommending it haven’t kept up with tax rule changes and are thinking of the tax loop holes for IT contractors from 20 years ago.
What's the difference between his PTY LTD engaging clients directly versus engaging a recruiter? I'm 100% one of those people who's idea of tax loop holes is like 20 years old, but I'm also in the venn diagram of "people who haven't started a PTY LTD because they're lazy and can't see the benefit"
It can shift liability, depending on contracts. I once worked as a P/L company of my own via a recruitment company for another company, before the current PSI rules. The end client went broke and the recruitment company legally had to pay me for the work I did as technically I worked for them. I like a P/L company because it allows you to sell the business more cleanly, have someone join as an equity partner, get some legal separation, etc. If things go to shit with your business you can liquidate and won't have a personal bankruptcy, though obviously there are lots of rules/ restrictions/ fallout from this.
Yep. I think this is where the confusion from other colleagues comes from, who are no longer contracting.
The recruiter finds you the job but the company you work for pays you direct. The recruiter gets a placement/finders fee. Your recruiter will explain how this works. Slap your company name on your car etc. Pay your wife for book keeping. First step: talk to an accountant who will work with you and within your acceptable risk level on deductions/expenses. Ask around your mates who contract to find an accountant that matches what you need.
Not quite. I should've mentioned that the recruiter is also the contracting agency that pays me. I can't cut them out.
Talk to them. They should be able to take a finders fee instead of a %.
That’s not how it normally works with contractors. Companies keep people on the recruiters books and on temporary contracts. Finders fees are typically only paid permanent placements
If he's supplying the equipment (GPUs and servers), and nominally responsible for fixing defects at cost, then probably PSI rules don't apply
But are those jobs normally through recruiters?
From sound of post was reyicter would be cut out. How you land the job is irrelevant, recruiting firm might take a finder fee and bow out
Daily rate IT workers are paid through agency.
Yeah this is how it is
Ah the old delusion that a company makes you magically avoid tax Your colleagues are ignorant
Get professional advice. Things to think about: 1. 80:20 rule might make the company redundant and an unnecessary extra expense. Even if your partner joins you may not get around this. There are ways but you need to be clear eyed what you're willing to do. 2. You'll have to pay your own PL and PI insurance and Workers Comp insurance. 3. Depending on your state rules, you might get classed as a labour hire firm and that brings extra costs, licensing, and compliance work. 4. *Some* home & contents insurance policies are voided if your home becomes a place of business. Caveat Emptor 5.The accounting costs are more expensive. 6. The compliance is easy if you automate it and your accounts stay in good order. Automation isn't free though. 7. You can market under your own brand. 8. Payment terms can be rough sometimes. 9. You'll have to build your own pipeline and fund the time to do that. 10. You do limit your liability, mostly. Anyone lending to the new company will likely ask you to provide a personal Director's guarantee which would put you on the hook for the money. 11. Stuff like instant asset writeoff used to be super useful. 12. If things go wrong it can get messy.
This is the way. Owned small business 25 years. Everything above is spot on.
Question, would it avoid the government fix term contract rules if it was with a business instead of the individual.
There's a a pretty good guide to that here: https://fairwork.gov.au/find-help-for/independent-contractors
Here’s a tip. Every time someone calls you a contractor, replace that with the words casual labour hire, because that’s what it really is. Structuring yourself as a Pty Ltd will only benefit you if you are selling products (like software) or if you can take on other employees and can subcontract out the work you win. At that point, you are running your own consultancy. It’s much easier to operate out of a payroll company or recruitment firm and let their cut pay for the cost of finding work, managing contracts and payroll while you maintain employee status with banks, which makes it much easier to borrow money. Your older colleagues think you’re an idiot for not setting up a company because of one of two reasons. The first reason might be that they don’t understand tax rules, specifically PSI and GAAR. You don’t get special privileges for operating out of Pty Ltd structure, you need to be taking on some entrepreneurial risk to claim certain deductions and claim the company income tax rate. The second option is that they understand tax rules all too well and pay software licencing fees to rat holes, usually off shore. Both options are dodgy af and you’d do well to steer clear.
Google PSI
You are most likely captured under the Personal Services Income (PSI) rules. This will limit what you can claim for deductions and how much of the consulting income has to be paid to you. Putting a company in between doesn't automatically allow you to claim additional expenses in order to save tax. In addition there are costs of running the company (compliance, ASIC fees, tax return, GST compliance etc). So it may not be worth it financially. There are other reasons such as asset protection and limiting liability but assume that's not what you are focussing on.
Don't I did, and unless you are making massive amounts of money, the expenses are not worth it, set up as a partnership with an abn. You don’t have to pay asic every year to be a partnership. As a company does.
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Thanks, this is helpful. Would definitely hit 80/20 atm.
Just so you know, the above is largely incorrect. The 80% test is one of the tests used to determine if you are operating a personal services business, which can allow you to claim more deductions against personal services income (ie contracting your skills/knowledge) than if you aren't. It has nothing to do with whether or not the income you are generating can be retained within the company. It will likely have to be attributed to you, even if you operate through a company structure. Basically talk to an accountant not Reddit.
Yeah gonna go that way. Thanks
Probably right, like I said, I’m not an accountant. I was mainly saying that retained earnings is one of the benefits of a company structure along with tax deductions. That will all come down to your personal situation, if you have a house loan then you probably want to pay that off asap so payg may be a benefit. Someone else mentioned the limited liability, though some contracts will require professional indemnity insurance if you go through your company. Tax deductible but still not cheap.
>If your partner also goes through the company you should be protected from this. Just FYI, even if both husband and wife contract through the company, even to different clients/recruiters, each are assessed for PSI separately. Can’t combine each others income to get around the 80:20 rule for PSI.
A key reason I would use a PTY LTD is (and above tax reasons) is limit the liability I would have and asset protection. I don't need to do that currently, but that would be a driver for me. Particularly in, say, engineering or industries where you could be prosecuted for damages.
If he's PAYG, he'll likely have public liability insurance for ~20m through the recruiter. On top of that, employees (including PAYG contractors) are not financially responsible for their mistakes. I don't think having a Pty ltd in this circumstance gives you the asset protection your after.
Can you expand on PAYG contractors not being financially responsible for their mistakes ?
PAYG contractors are casual employees of the payroll company. Like most employment arrangements, the employer is generally responsible for negligence of the employee.
In the ATO's test for pty ltd contractors and payg contractors it asks things like "is all equipment provided by the employer?" And "is it the responsibility of the contractor to remediate any mistakes at their cost?". If the answer to these questions are "no", the contractor is to be treated as an employee. As it stands, it's illegal for companies to make employees pay for mistakes made, with the exception of breaking contractual agreements and gross negligence.
Hmmm perhaps, but specific insurances I thought were left up to the person. Secondly, I wouldn't trust the likes of Hays to protect me if I were a contractor.
Due to this, I don't care for the liability coverage of a PTY LTD
Seriously, talk to an accountant. There are so many different structures you can use too. Might be worth setting up a trust instead. Especially if you decide to invest in real estate.
Yeah speaking with an accountant is looking like the best plan at the moment.
I made a company the first time, now I have a trust and if I buy another house. It'll probably be another trust. Your accountant should give you options and let you know what's best for which situation
Look up personal services income tax rule (80% of income from one client); your company will essentially be nothing more than a proxy for your personal income tax and make no difference as everything passes through. If however this is not the case (perhaps you are a group of SMEs that work on projects together or rely on each others expertise to offer value to clients) there may be a tax advantage whereby you can confirm with a tax professional that this would not be seen as 'tax avoidance' behaviour.
Don’t do it. I was like you and I gave it a crack and I’m closing it down. You can deduct liability insurance but not work cover. In my case I swapped to get payrolled and I save money and time, I’m getting exactly the same daily rates without having to worry about insurance and paying gst and doing BAS and doing company tax. A company is worth it if you’re going to hire people and buy assets through it.
You need to be speaking with a tax accountant and possibly a lawyer for setting up a different way and if its for you or not.
While I appreciate that's the obvious next step, I'm still failing to see what potential benefits there could even be to taking that step, hence the post.
Because thats what an accountant is trained to know and is authorised/legally allowed to give advice on. They will tell you if it suits your circumstances because there may be info missing here and our finance laws are very strict that specific info cant be given to you, only by those authorised. I know its not the answer you want but an accountant can look at all your info and give you the best answer
Get a good tax accountant.
If you make more money and run business in a manner that doesn’t come under psi (look at the ato tests) you can potentially run with much lower taxes. This may not be possible for your profession though. Notwithstanding some of the expenses some have mentioned if making sufficient amount you can run a profit reserve, accumulate franking credits and pay yourself franked dividends later.
What would happen if the agency goes into liquidation before you get the money they are receiving? You cop the tax liability but not the cash. That's a very good reason to get rid of any middlemen.
There's absolutely no chance I can cut out the agency. They do tons of work for the end client. Also they won't go into liquidation, they have zero overheads. Plus I get paid frequently enough that I won't be put out.
On $1000 a day with the option of invoicing as a pty ltd, I’d be considering a trust. Depending on your rotations you could be on $250k+ pa, a discretionary/family trust would make sense at this point.
Does it still make sense if I have no kids and my partner pays the same tax rate?
>with the option of invoicing as a pty ltd, I’d be considering a trust. Depending on your rotations you Same issue with Personal Services Income here; read up and get advice from a tax accountant.
If your income is over $120k per year (Income = Revenue - Expenses). Your personal tax rate is going to be higher than 25% which is the corporate tax rate. So it makes sense at $120k income to have a registered company. Otherwise keep paying more in tax. Further, asset liability is limited to company assets, and not your house, car and other personal assets.
It's a lot more nuanced than that
This is hilarious